Transcript: National Security Adviser Gen. James Jones and Sen. John McCain, R-Ariz.

STEPHANOPOULOS: Good morning and welcome to THIS WEEK. Our
exclusive headliners today: General Jim Jones, Senator John McCain.

(BEGIN VIDEO CLIP)

JONES: We are focused on al Qaeda, but we're also focused on
extremism of any form.

(END VIDEO CLIP)

STEPHANOPOULOS: In his first Sunday interview, the president's
national security adviser confronts two wars, Dick Cheney's scorn,
terrorists in the U.S., and gays in the military.

Then, the GOP's candidate in 2008 weighs in on Obama's start and
his party's future.

(BEGIN VIDEO CLIP)

MCCAIN: I realize that elections have consequences.

(END VIDEO CLIP)

STEPHANOPOULOS: McCain and Jones, only on THIS WEEK.

Plus...

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: Now is the time to put a new foundation
for growth in place.

(END VIDEO CLIP)

STEPHANOPOULOS: ... the recession may be winding down, but will
lingering job loss and record deficits stall Obama's agenda? That and
the rest of the week's politics on our roundtable with George Will,
Cokie Roberts, Sam Donaldson, and Robert Reich.

And as always, the "Sunday Funnies."

(BEGIN VIDEO CLIP)

JAY LENO, HOST, "THE TONIGHT SHOW WITH JAY LENO": It was hot
today, wasn't it? I'll tell you, whew, I was sweating like John
Edwards waiting to watch his wife on Oprah.

(LAUGHTER)

(END VIDEO CLIP)
ANNOUNCER: From the heart of the nation's capital, THIS WEEK
with ABC News chief Washington correspondent, George Stephanopoulos,
live from the Newseum on Pennsylvania Avenue.

STEPHANOPOULOS: Hello again, and happy Mother's Day to all of
the moms watching. We're going to begin with a Sunday first.

General James Jones, welcome to THIS WEEK, your first appearance
as national security adviser.

JONES: Exactly. Thank you.

STEPHANOPOULOS: You all had a busy week this week. The heads of
Afghanistan and Pakistan came here to the United States to meet with
the president -- to meet with the president's entire team.

And you seemed to be on the same page, yet after the meetings,
the president of Afghanistan, Hamid Karzai, said that all air strikes
-- all American air strikes in Afghanistan must end. Will the U.S.
comply with that demand?

JONES: Well, I think that we're going to take a look at trying
to make sure that we correct those things we can correct, but
certainly to tie the hands of our commanders and say we're not going
to conduct air strikes, it would be imprudent.

That's part of the combined arms package and so we probably would
not do that. But we are going to take very seriously the -- and
redouble our efforts to make sure that innocent civilians are not
killed.

STEPHANOPOULOS: Does President Karzai understand that you're not
going to comply with that demand? And what do you expect his reaction
to be?

JONES: Well, I think he understands that we have to have the
full complement of our offensive military power when we need it. We
have to -- we can't fight with one hand tied behind tied behind our
back.

But on the other hand, we have to be careful to make sure that we
don't unnecessarily wound or kill innocent civilians. But the other
side of the coin is that it -- what makes it difficult is the Taliban,
of course, not playing by the same rules.

They're using civilians as shields. So we have to take a look at
this, make sure that our commanders understand the -- you know, the
subtleties of the situation, the complexity of it, and do the right
thing.

So it's a difficult problem, but it's not unsolvable.

STEPHANOPOULOS: President Karzai also said while he was here
that he believes Osama bin Laden is alive. Yet President Zardari of
Pakistan says he thinks bin Laden is dead.

What is the best U.S. intelligence right now?

JONES: I think the best intelligence is that we gauge our
reaction based on what intelligence we have. And it is inconclusive.
Secondly, we wait and see how long it has been before we've seen him
actually make a statement, release a video, and make our judgments on
that.

The truth is, I don't think anybody knows for sure.

STEPHANOPOULOS: Well, let me ask you about that, because we saw
some audio tapes from Osama bin Laden in both January and March of
this year, and it's my understanding that U.S. intelligence thought
that those were authentic.

JONES: Mm-hmm.

STEPHANOPOULOS: So what has changed since then to make the
intelligence inconclusive?

JONES: Well, as of March, they thought it was authentic, but we
don't have any firm information that says that that has changed one
way or the other. So I think we'll just continue to press on and
we'll see what happens there.

STEPHANOPOULOS: What does your gut tell you?

JONES: I -- my gut -- I would like to know conclusively if
that's not the case. And I think we have that evidence.

STEPHANOPOULOS: Does it matter any more if he's dead or alive?

JONES: I think it matters symbolically to the movement, for
sure. But it's clear that that movement has been resilient in
replacing their leaders as quickly as we are able to capture or
eliminate them.

But I think symbolically it would be a very big thing if he
weren't.

STEPHANOPOULOS: Let me ask you about Vice President Cheney, he
has been something of a media tour lately. And the big point he is
making is that the Obama administration actions, repealing some of the
Bush administration counterterrorism policies, announcing you're going
to close Guantanamo, ending enhanced interrogation techniques are all
putting America at risk of another attack.

Now that is a serious charge coming from a former vice president.
What's your response?

JONES: Well, I would take issue with some of those allegations.
And I think, frankly, in the Bush administration there wasn't complete
agreement with the vice president on that score.

The truth of the matter is that the Obama administration
inherited a situation at Guantanamo that was intolerable. There are
only two people had been - who had entered a plea, they both had been
released with time served. Hundreds of people went through Guantanamo
and were released. Many of those are back on the battlefield right
now waging war against us again.

The Obama administration has put a stop to that temporarily as
you know. We do have some decision points coming up. The president
is absolutely committed to making sure that we recognize the rule of
law principle, we don't make America less safe and that we continue to
try to find the right balance in what could be a multi-layer approach.

STEPHANOPOULOS: I want to get to more on Guantanamo in a second
but let me just press this one more time. The vice president, former
vice president says the Obama administration is putting America at
risk of another attack.

JONES: Oh, I don't believe that.

STEPHANOPOULOS: That's clear enough. Let me ask you more about
Guantanamo, then. Because the Congress has sent several more strong
messages to the administration about Guantanamo this week. The
chairman of the House Appropriations Committee, David Obey, did not
include the money for closing Guantanamo in his war spending bill and
Republican leaders in the Congress have mounted a campaign against
bringing any of the detainees from Guantanamo into the United States.
Here's Senator Kit Bond.

(BEGIN VIDEO CLIP)

SEN. CHRISTOPHER S. BOND, R-MO.: Whether these terrorists are
coming to prison in Kansas or a halfway house in Missouri or any other
state, I can tell you this. Americans don't want these terrorists in
their neighborhoods.

(END VIDEO CLIP)

STEPHANOPOULOS: In fact, the Republican leadership has
introduced legislation called the Keep Terrorists Out of America Act
which would require approval from both the governor and the state
legislature of a state before any detainees can be brought in. What
does the administration think of that legislation?

JONES: Well, the first think I would say about that is there has
been no decision taken. This is an issue that we are - the president
is studying but absent the final determination this is all
speculation.

STEPHANOPOULOS: But you have determined - you don't know exactly
how but because we're asking other countries to take detainees, that
we're probably going to have to take some as well. Secretary Gates
said that to the Congress this week.

JONES: We're going to have to figure that out and those
discussions are currently under way so it would be premature to
comment on what the president might or might not do at this particular
point.

STEPHANOPOULOS: But how about the legislation? They are saying
before anyone comes back, a governor and a state legislature must
approve. Do you have any problems with that?

JONES: Well, we'll take that under advisement. These are near
term subject that are currently being discussed and that is going to
have to be one of the decision points and one of the discussions that
we'll have on this issue but it hasn't been determined yet.

STEPHANOPOULOS: This - I'm just a little confused on that
because Secretary Gates did say a couple of things when he testified
this week. He did say that some would have to be brought into the
United States. He said there's this problem of 50 to 100 detainees
who can't be tried and can't be released and we're going to have to
find a way. In fact, the Pentagon is looking into building a prison.

You're saying now you've already made the threshold decision that
some detainees are going to have to come to the United States.

JONES: Well, if you're going to ask other to take some, you're
going to have to figure out how you're going to have to do that and
that's where we are right now. No decision has been taken as to
exactly how to do that.

STEPHANOPOULOS: Because this has become so thorny - the
president wants to close Guantanamo by the January deadline. Are you
open to extending that deadline? This has turned out to be quite a
difficult decision to implement.

JONES: Well, the - again, the very discussions on these issues
and how to do this are currently on the table at the White House. We
are coming up on the 20 May deadline for a decision so there will be
some announcements made in the near future but no decision has been
taken yet.

STEPHANOPOULOS: But the president has not ruled out bringing
back military commissions try them, either, correct?

JONES: I think the - all options are on the table. The
president has said that at some point there may be a multi-layered
approach that has to be developed in order to solve this problem but
it's clear that we want to maintain our values, we want to protect the
judicial process and this president is not going to do anything that's
going to make American safe - less safe by bringing people into the
country that is going to put ourselves at risk. That is simply not
going to happen.

STEPHANOPOULOS: Let me bring up the issue of gays in the
military. The president has said he wants to reform that policy,
allow gays to serve openly in the military and actually a remarkable
letter from the president was released this week to Lieutenant Sandy
Tsao, who was a serviceperson who was discharged from the military
because she's a lesbian and there is this handwritten note I want to
show our viewers right now from the president to Sandy in which he
says, "Thanks for your wonderful and thoughtful letter.

STEPHANOPOULOS: It is because of outstanding Americans like you
that I committed to changing our current policy. Although it will
take some time to complete, partly because it needs congressional
action, I intend to fulfill my commitment, Barack Obama."

Now, this is in the Congress right now. Will take legislation to
completely overturn but some of the president's supporters like
Congressman Rush Holt of New Jersey say that what the president can do
right now is issue an executive order to review the policy and order
the military to stop investigation and prosecutions while that review
is going on, while the Congress is considering this legislation. Will
the president issue such an order?

JONES: Well, that is, of course, up to the president. And this
issue is something that has been brought up during the campaign. We
have had preliminary discussions with the leadership of the Pentagon,
Secretary Gates, the chairman of the Joint Chiefs, this is, as you
know, George, better than most, this is an issue that is not going to
be a light switch but more of a rheostat in terms of discussing it and
building - having the discussions that have to be had with the
military in order to make sure the good order and discipline of the
military ...

STEPHANOPOULOS: And I understand that and this is a complicated
issue.

JONES: So it's a complicated issue. It will be teed up (ph)
appropriately and it will be discussed in the way the president does
things, which is be very deliberative, very thoughtful, seeking out
all sides on the issue and trying to ...

STEPHANOPOULOS: But if the president is against the policy, why
not suspend prosecutions and investigations while that review
continues?

JONES: Well, maybe that's an option that eventually we'll get to
but we're not there now.

STEPHANOPOULOS: A lot of your former colleagues in the military,
a thousand flag and general officers including 50 four stars have
written a letter to the president opposing any change in the policy,
saying that their past experience as military leaders make them
concerned about it. They think it's going to have effect on morale,
discipline, unit cohesion, what do you say to your former colleagues?

JONES: Well, I think - as I said, this is illustrated by the
fact that this is a very sensitive issue and it has to be discussed
over time and it has - all sides have to be heard. But I think most
of us who have served in the military believe that the standards of
conduct is what determines the good order and discipline. So as long
as conduct by all members of the military is not detrimental to the
good order and discipline, then you have cohesion in the ranks.

But there is ...

STEPHANOPOULOS: But that gets to the heart of the problem. I
mean, if you're saying any kind of homosexual act is conduct ...

JONES: I'm saying that it applies - it has to be a uniform
policy for all members of the military in order to function as a
military has to function. We will have long discussions about this.
It will be thoughtful. It will be deliberative. The president I know
will reach out to fully understand both sides or all sides of the
issue before he makes a decision.

STEPHANOPOULOS: But it will be overturned.

JONES: I don't know. We'll have to - the president has said
that he is in favor of that. We'll just wait - we'll have to wait and
see - as a result of the deliberations and as a result of the - in the
months and weeks ahead. We have a lot on our plate right now. It has
to be teed up at the right time so - to do this the right way.

STEPHANOPOULOS: Let me ask you one final question. Prime
Minister Netanyahu of Israel is coming to the United States next week.
He will be here next Monday and the Israeli newspaper "Haaretz"
reported on a telegram, reporting on a meeting between you and a
European foreign minister.

Let me show you what that said. It said that, "according to this
telegram you told the foreign minister, 'The new administration will
convince Israel to compromise on the Palestinian question. We will
not push Israel under the wheels of a bus put we will be more forceful
toward Israel than we have been under Bush.' Jones is quoted in the
telegram as saying that the U.S., E.U. and moderate Arab states must
redefine a satisfactory end game solution."

Does that mean you're going to press Prime Minister Netanyahu to
full accept a two-state solution?

JONES: I think it means that this administration is going to
engage fully. That is to say, using all aspects of the interagency
process to make sure that the security of Israel is not compromised,
that the issue of Palestinian sovereignty also has its place at the
table. There are many expectations around the world, in the Arab
World and in the European community that we are at a moment where we
can make progress with regard to the Middle East. It's going to take
American leadership and American involvement and I think the signal is
going to be that all levels of our government we're going to do
everything we can to encourage this longstanding problem to gradually
come to - show clear progress that we're intent on ...

STEPHANOPOULOS: Is there any way to make progress if Israel
doesn't say they're clearly for a two state solution.

JONES: I think obviously Israel has said it's for a two state
solution, at least...

STEPHANOPOULOS: The prime minister hasn't said that yet.

JONES: That was the position of the former government. And we
understand Israel's preoccupation with Iran as an existential threat.
We agree with that.

And by the same token, there are a lot of things that you can do
to diminish that existential threat by working hard towards achieving
a two-state solution. This is a very strategic issue. It's extremely
important. And we're looking forward to having a good, constructive
dialogue with our Israeli friends when they visit Washington in the
next seven or eight days.

STEPHANOPOULOS: General Jones, thank you very much for your time
this morning.

JONES: It's my pleasure to be with you, thanks.

STEPHANOPOULOS: And let me bring in Senator John McCain.

Welcome again.

MCCAIN: Thank you, George.

STEPHANOPOULOS: You just heard General Jones, let's pick up
right there. Does President Obama have to say quite clearly to Prime
Minister Netanyahu, we've got to begin with the two-state solution?

MCCAIN: Well, I think that it has been previous policy in
previous Israeli governments. We respect the results of a democratic
process. And the fact is that I think that we have to push the entire
peace process forward.

But I'm not sure the timing is right, right now, with a new
government in Israel for us to dictate to them their policy. But I
applaud the Obama administration's renewed efforts to try and move
this process forward.

STEPHANOPOULOS: Let me also ask you about Guantanamo. You saw
that the general and I talked about that. And you and President Obama
share the same goal where you both say that Guantanamo should be
closed. You and the president share the same goal on the enhanced
interrogation techniques.

Yet, especially on Guantanamo right now, it appears that there
has been rising opposition to the Congress -- to this, what appears to
be a necessity, that some of these detainees are going to have to come
to the United States.

So how do you work with President Obama to meet the goal that you
both have set?
MCCAIN: Well, I don't know how you walk it back to the initial
announcement. To announce you're going to close Guantanamo within a
year, and not have a comprehensive package for how you address these
issues that understandably have arisen.

I mean, what do you do -- what kind of process do you put the
people through that remain? How do you ensure that they don't return
to the battlefield, as about 10 percent of them have, including some
very high-ranking people?

What should have taken place, in my view, was the announcement of
the closing and an announcement of exactly how we're going to put
these people on trial. The Military Commissions Act that Senator
Graham and I originally proposed is clearly what they are returning
to.

How you -- where you're going to put the people that are enemy
combatants that you don't have enough information to convict them, but
it's clear that they can't come back...

(CROSSTALK)

STEPHANOPOULOS: That key group, the 5,200, are probably going to
have to come and be detained here in the United States, correct?

MCCAIN: I don't know what they're going to do. Because...

STEPHANOPOULOS: Would you be opposed to that?

MCCAIN: I would certainly be -- would -- well, I don't know if I
would be "opposed" to it, because I would probably want to judge them
on a case-by-case basis. I understand the local objection. And
senators and congressmen objection to saying, here are some people
that we're just going to dump onto the community.

But we could have avoided all of this if there had been an
announcement of the closure of Guantanamo and the process for
resolving the cases of people who are detained there, whether you
release them, whether you ask other countries to take them, what the
process for trial is, what the process of those that you just
discussed who are "enemy combatants" but you can't convict.

That is a terrible mistake. Announce the closure, but don't
address the underlying problems that a lot of us have been wrestling
with for years.

STEPHANOPOULOS: So -- but how do you fix it now?

MCCAIN: I would say, I'm not going to close Guantanamo until I
have a comprehensive approach to every aspect of this problem of the
detainees. I have put them on trial, who tries them, what are the
rules of evidence? What is the case of interrogation techniques that
were used? At which time that that evidence would be admissible.

There's a whole series of subsequent issues.

STEPHANOPOULOS: So you're no longer for closing -- you're no
longer for closing.

MCCAIN: I'm for closing Guantanamo, and I said I was for closing
it. But I'm for a comprehensive solution of all of the issues
surrounding Guantanamo, which now obviously are facing serious
roadblocks in Congress, because the announcement was made without
addressing the underlying problems associated.

STEPHANOPOULOS: So relax the deadline, no January deadline?

MCCAIN: I would relax -- I said I wanted to close Guantanamo,
but I also said I wanted to address all of the issues. So I never set
a deadline. But so, no, I wouldn't set a specific date until I had
resolved all of the issues surrounding the detainee question,
including a military commission that would be appointed and authorized
to address some of these cases.

STEPHANOPOULOS: How about this issue of "don't ask, don't tell"?

STEPHANOPOULOS: It's now been bedeviling the military for 15, 16
years right now. Growing support to reform the policy. More than 100
members of Congress say it should be reformed. Former chairman of the
joint chiefs, General Shalikashvili, have said it should be reformed.
Where are you on that today and how would you reform the policy if at
all?

MCCAIN: Again, I've said for months, I will be glad to have a
thorough review of the policy by the Joint Chiefs of Staff and their
recommendations. You might recall it was General Powell who weighed
in back early on in the Clinton administration that said we need to
have this policy and it's been successful. We now have the best-
trained, best-equipped, most professional military in the history of
this country in my view.

So I would rely on a study by the Joint Chiefs of Staff as how
the impact of changing this policy would have on our ability to carry
out our military missions and then I would make judgments from there.

But in all due respect, right now the military is functioning
extremely well in very difficult conditions. We have to have an
assessment on recruitment, on retention and all the other aspects of
the impact on our military if we change the policy.

In my view, and I know that a lot of people don't agree with
that, the policy has been working and I think it's been working well.

STEPHANOPOULOS: But let me ask you about your party. Not
working ...

MCCAIN: Not working.

STEPHANOPOULOS: Not working as well. You've got this "Time
Magazine" cover this week saying, "Endangered Species, the
Republicans". Is your party an endangered species?

MCCAIN: I probably would not go that length. We all work in
cycles for many years. We have seen parties down and parties up.
That's a great thing about American politics. But having said that,
do we have to do a better job of getting our message out? Do we have
to do a better job recruiting candidates? Do we have to do a better
job of outreach? Outreach to many Americans that don't feel that they
can be part of our party? Absolutely. Absolutely.

And this conversation that Eric Cantor, which some have
criticized and others have begun, I think it's a great thing. Why not
have a conversation with the American people. Find out what they
want.

STEPHANOPOULOS: Vice President Cheney has been part of that
conversation as well and he's been saying that the party should not
moderate. Here's what he said this week.

(BEGIN VIDEO CLIP)

DICK CHENEY, FORMER VICE PRESIDENT: I think it would be a
mistake for us to moderate. The idea that we ought to moderate
basically means we ought to fundamentally change our philosophy. And
I for one am not prepared to do that and I think most of us aren't.

(END VIDEO CLIP)

MCCAIN: I think we're kind of in a word game here. I don't want
to moderate, either. I think our policies, the principles of our
party are as viable today as they have in the past. In all due
respect, the previous administration, by letting spending get
completely out of control, by betraying some of those principles of
our party, cost us a couple of elections.

And maybe I didn't do a good enough job communicating with the
American people. But we have to improve our outreach and our
communication and that doesn't mean betrayal of principles. I think
maybe it means that adjusting to the 21st century in communications,
in values, in goals, in all the things the American people want.

STEPHANOPOULOS: But some of your closest associates say it's
more than a communications problem.

MCCAIN: It is.

STEPHANOPOULOS: Your former campaign manager Steve Schmidt came
out and said unless the party has a more live and let live philosophy
on issues like gay rights and gay marriage, your own daughter has
taken the same position, you're not going to be able to attract
especially the young generation.

MCCAIN: I think we have to be an inclusive party. That does not
mean betrayal of fundamental principles. One of the fundamental
principles of the Republican Party is to as much as possible, to let
people lead their own lives without government interference in their
lives. To go as far as their hopes and dreams and aspirations will
take them.

We have to understand that there may be a candidate that can win
in one part of our country like the South, may not be able to get
elected in Pennsylvania. And local needs and local issues are
important but fundamental principles can be articulated. I believe
America is a right of center nation. I believe the Republican party
is a right of center party. We have to get in synch with the American
people ...

STEPHANOPOULOS: Does that mean more toleration of those who
believe that women should have the right to an abortion? Of those who
believe that gays and lesbians should have full civil rights?
MCCAIN: It means that we can have people in our party who do not
have the same views on specific issues as long as we share common
principles.

Now, I don't agree with my daughter on specific issues. I still
love my daughter and I respect her views and I think there is a place
for her in the Republican Party. I do. I think we've got to broaden
our - enlarge our tent and at the same time stick to our fundamental
principles which are right of center. And I don't - it's not that
hard, I don't think, except that we've got to do a better of job of
saying, for example, Hispanic voters in my state and in the Southwest
are pro-life, small business, low taxes, patriotic, et cetera.

We should be able to get a lot more Hispanic participation in the
Republican Party.

STEPHANOPOULOS: Well, Senator, thank you very much. We'll see
if it happens in the future.

You mentioned your daughter. Let me also wish a happy Mother's
Day to your mom, Roberta, 97, still going strong. I read she's going
back to Europe again in the fall?

MCCAIN: Thanks. She is. And she is incredibly active. It's
great to be with you, George.

STEPHANOPOULOS: Good to see you, Senator.

MCCAIN: Thank you.

STEPHANOPOULOS: The roundtable is next with George Will, Cokie
Roberts, Sam Donaldson, and Robert Reich.

And late, the "Sunday Funnies."

(COMMERCIAL BREAK)

STEPHANOPOULOS: We will be right back with the roundtable and
the "Sunday Funnies."

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

OBAMA: In the next hundred days, I will learn to go off the
prompter, and Joe Biden will learn to stay on the prompter.

(LAUGHTER)

OBAMA: In the next 100 days, our bipartisan outreach will be so
successful that even John Boehner will consider becoming a Democrat.
After all, we have a lot in common. He is a person of color.

(LAUGHTER)

OBAMA: Although not a color that appears in the natural world.

(LAUGHTER)

OBAMA: The next 100 days, we will house train our dog Bo.
Because the last thing Tim Geithner needs is someone else treating him
like a fire hydrant.

(LAUGHTER)

(END VIDEO CLIP)

STEPHANOPOULOS: President Obama cracking himself up last night
at the White House Correspondents Dinner. We're going to talk about
that in a little bit. But let me bring in the roundtable right now.
I've got George Will, as always, Robert Reich from the American
Prospect and Berkeley, Sam Donaldson, and Cokie Roberts.

And we will get to the jokes later, everybody rate the president
as joke-teller in chief. But let's begin with the economy. The
president was in a much more somber mood on Friday when we got these
unemployment numbers. A little bit better than expected, but still
pretty tough news. More than 500,000 jobs lost.

Here was the president.

(BEGIN VIDEO CLIP)

OBAMA: Although we have a long way to go before we can put this
recession behind us, the gears of our economic engine do appear to
slowly -- to be slowly turning once again.
Consumer spending and home sales are stabilizing, construction
spending is up for the first time in six months.

(END VIDEO CLIP)

STEPHANOPOULOS: Maybe the slip there, George, is revealing.
There has been a lot of good signs lately in the economy, but no one
knows how soon we're really going to be able to turn out of this.

WILL: On the one hand, it's difficult to stop the American
people from creating wealth, we're an industrious people with a
continental market.

On the other hand, the president submitted a budget this week
that has $1.2 trillion of new debt. Now that's borrowing that has to
come from somewhere. And a lot of it's going to come from domestic
capital because we can't count on our allies to continue buying our
debt as they have in the past.

And the question is whether this will crowd out private capital
investment, crowding -- no doubt lead to inflation, and nip the
recovery, such as it is, in the bud.

STEPHANOPOULOS: What's the answer?

REICH: Well, the answer right now is that we don't have to worry
about that because we have so much underutilized capacity. One out of
10 Americans who are either unemployed or just give up -- have given
up looking for work that we do need to spend.

The government is the spender of last resort. Now eventually two
years from now, three years from now, we are going to have to worry
about possible inflation and the Fed is probably going to have to pull
in its horns.

But right now is not a time the government ought to worry about
those kinds of things.

DONALDSON: Some people say good news on the unemployment front
because the number was a little lower than the last four or five
months. And it reminds me of somebody during the Great Depression
where we had 25 percent of our people were out of work. And someone
said, yes, but it has leveled off, you know? I don't...

STEPHANOPOULOS: I know, can you imagine, five years ago, someone
said we lost 500,000 jobs this month, good news.

(LAUGHTER)

DONALDSON: I don't know much about it except I buy the idea that
until the banks are stabilized, until they can lend again, until the
potential $600 billion of toxic mortgages can be dealt with, we're not
going to be able to get back to a full measure of spending, lending,
and buying.

And they've got a program right now that has something to do with
public and private money combining to buy these mortgages. But it
hasn't gotten off the ground. And a lot of economists think it won't
work anyway.

ROBERTS: Well, the banks -- there was good news on the banks
front too though this past week. I mean, again, what is good news?
But, you know, that they weren't in as bad a shape as was feared.

So I think what the administration has to be careful here is that
they don't want people to think that it has turned around, because,
first of all, it hasn't, but second -- and the unemployment numbers
are going to get worse before they get better.

But secondly, they still have a lot of grand plans. And if
people think that the economy is writing itself, it's going to be very
difficult for them to carry through on these grand plans.

STEPHANOPOULOS: That's definitely true. But they do believe --
and I was talking some people on the economic team this week. They
believe there's a chance that the recession will actually end in June.
That we'll actually see growth in the third...

ROBERTS: Well, we've heard Bernanke say that he thought there
would be growth...

DONALDSON: End of the year.

ROBERTS: ... in this year.

STEPHANOPOULOS: At the end of the year, but the problem, you get
at it with the jobs. And, Bob, check me on the numbers here, in order
to start creating jobs again, bringing down the unemployment rate, you
don't only need growth, you need 4.5 percent growth for a sustained
period of time.

REICH: Absolutely. And I think that when we talk about -- or
anybody talks about hitting bottom, what we really have to understand
is that the bottom is a kind of an undefined concept here. We don't
know what a recovery is because we can't go back to the old economy
which was based on debt and Wall Street getting out of control. So
what is a recovery? What is a kind of the economy of the future?
Nobody knows.

(CROSSTALK)

STEPHANOPOULOS: ... first of all.

WILL: Well, that's right. And the trouble is the American
people, in their native perversity, have started to save money. It's
the same exact...

(CROSSTALK)

WILL: ... 4 or 5 percent? And since 70 percent of our economic
activity in what we used to call normal times is personal consumption,
is that compatible with ...
DONALDSON: That is exactly what a recovery is. Some guy said I
saw a quote in the paper I use this test, do I want it, do I need it?
And if I don't need it I don't buy it. We have to get to the point
where people buy what they want.

REICH: George puts his finger on what is the real dilemma here.
And that is what is rational for the family in terms of saving money
is irrational from the standpoint of the economy as a whole. The
banks that survive the stress test, for example, are they going to go
back to lending like they did before? They can't possibly.

STEPHANOPOULOS: Let me press you on that for a second. Because
a lot of economists like Paul Krugman on this program, like you, like
Joe Stiglitz, Nouriel Roubini, thought there was no way that this
approach that the administration was taking was the right course. You
believed that we should go in more radical, temporarily take over the
banks. Can you now say, though, that the Geithner approach, the more
tempered approach was right?

REICH: Well, what we can say on the basis of very preliminary
evidence is that the stress tests have fulfilled the goal that they
set to fulfill, which was to reassure potential investors in a bank.

(UNKNOWN): Public relations.

REICH: No. It's confidence. It's to make sure and reassure
potential bank investors that there are not worse problems hiding
there.

ROBERTS: But there are ...

DONALDSON: ... not stressful enough.

REICH: It's a distinction. It's not the same thing as ...

ROBERTS: But there are worse problems, is Fannie and Freddie,
which are in terrible shape and going to need even more ...

STEPHANOPOULOS: $19 billion, right?

ROBERTS: More and more government infusion. At the same time
you're saying, oh, well, gee Bank of America only needs $34 billion
...

DONALDSON: And the stock went up $1.26.

ROBERTS: Then you still have these now have been taken over by
the government needing government infusion.

STEPHANOPOULOS: That's all true. Right now there's about $110
billion in the TARP, in the rescue fund. Some banks are maybe going
to be giving money back, JPMorgan is going to be giving money back,
Goldman Sachs is going to be giving money back.

That number is actually going to go up before it goes down.
Maybe some of it has to go to Fannie Mae and Freddie Mac, maybe some
to GM. But you're going to have probably a pot of money of about $100
billion, there, George Will, that may be available for either more
bailouts or more government investment or spending.

ROBERTS: Just what you want, George.

WILL: Well, next on the list are municipalities, which is to say
public employees' unions which have put municipalities - actually
municipalities put themselves in trouble with improvident contracts
with their public employees. And now we're going to bail them out.
The common theme of all of this is save the unions. This phony, make
believe Chrysler bankruptcy is really a way of helping the UAW.

STEPHANOPOULOS: How has it been a make believe bankruptcy?

WILL: Because they have altered bankruptcy law and prearranged
to give the UAW privileged status over what bankruptcy law would've
given to normal creditors.

DONALDSON: But the other part of public relations, we're going
to save $17 billion, one half of one percent of the $3.4 trillion
budget. But the very things that the president outlined as savings,
people up there on Capitol Hill will not allow. That's not --
Meanwhile, he wants to do reform of the health care system. I've seen
estimates ranging from several hundred billion to even $1 trillion if
we get it all done that we have to pay for. Because it's not in this
budget. There's no place card in this budget. You have to come up
with new money if you're going to do it.

REICH: I think this is the big long-term question. I mean we
have a short-term issue, how do you get the economy back and what does
it mean to get the economy back? But the long-term is, how do you pay
for health care? And if the Congress continues to say, no, we're not
going to limit dividends or deductions for the rich. No, we are not
going to even limit employer-provided health care for the rich. No,
we're not going to do this. Then there's no money.

WILL: Just a moment, now.

STEPHANOPOULOS: Well, here's a blue sky idea. If you've got
$100 billion in the bailout fund, why not use that as a down payment?

REICH: Well, try to sell that to Congress. I think that $100
billion, or it actually looks like it's going to be $135 billion,
that's going to be eaten up, it's going to be eaten up by
municipalities, it's going to be eaten up by Fannie and Freddie, there
are many places where that's going to go.

ROBERTS: But the truth is when we look at these enormous
deficits with the exception of this aberrant bailout situation. When
you look at them, you're talking about health care. It's Medicare,
it's Medicaid for the states, and it's health care costs for the
businesses.

STEPHANOPOULOS: Which is why the president emphasizes cost
control all the time.

ROBERTS: All the time. And there are in both houses of Congress
proposals to have commissions, now sometimes these work and sometimes
they don't, but to really take a look at Medicare, Medicaid, and
Social Security. And being objected to ...

DONALDSON: Speak to Nancy Pelosi and Harry Reid, the two
Democratic leaders oppose the idea of commissions and the president is
not getting behind because he wants to do health care. He is not
getting behind this idea.

STEPHANOPOULOS: He is not getting behind the commission right
now but let me press that point. Because the administration believes
the stars are aligning for health care this summer. They think
everything is coming together. What I can't figure out and I ask a
lot of people about it, I still don't see the five, six, seven
Republican votes minimum needed ...

ROBERTS: One of the things, one of the stars that is aligning is
that the Senate has now invested a great deal of time and effort in
this question. And as you well know, that takes on a life of its own.
They don't want to have done this much work on something and then have
it go to waste.

STEPHANOPOULOS: So even if they're opposed, senators like Chuck
Grassley and Bob Bennett ...

ROBERTS: And there are ways to get to them. The question of
getting from here to there ...

DONALDSON: In reconciliation, of course, you just have to have
it.

STEPHANOPOULOS: You just have to get to 50 votes.
Realistically, that's going to be very hard to do. The administration
even though they're allowing says they don't want it to go down to
that.

WILL: The big principle obstacle is the president, because there
is a bill in the Senate, it's the Wyden-Bennett bill, Wyden, liberal
Democrat for Oregon, Bennett, Utah, the reddest state in the union,
conservative Republican, they have a proposal that gives the left a
mandate. Everyone is required to buy health insurance. It gives the
right to fact that they will with their tax credits and tax subsidies
and all the rest buy it from private providers. You could get 70
votes for that.

STEPHANOPOULOS: But it also includes the John McCain proposal to
take away some of the tax deduction for employer provided health care.

REICH: Yes. That's the fight.

WILL: But I think if you got it to the floor without the so-
called public option, that is the government competing inherently
unfairly against these private companies.

REICH: That is -- that is the key to making this work, according
to many Democrats. To have a public option.

ROBERTS: One of the things that's happening now is that as a
result of even having that on the table, the health insurers are
saying, wait, wait, regulate me, regulate me. Please, regulate me.
Stop me before I sin again.

DONALDSON: Let's talk about politics. Can the president who has
temperized (ph) now a lot of his positions, but can he give up on a
public option?

WILL: Sure.

ROBERTS: I think he already has.

STEPHANOPOULOS: I want to move on to something else. I think
Cokie was talking about the insurers. I think this week insurance
companies and other health care providers who were very much against
the Clinton health care proposal come around and say they're ready to
get to the table right now on this.

ROBERTS: As long as there's not the public option. That's what
they don't want to have out there.

REICH: Well, the parallels to 1994 are in everybody's mind. A
jobless recovery combined with a question of whether you get health
care. Remember what happened to Clinton. And also every Republican
in town is dreaming of 1994. Could we do it again? Could we destroy
health care with a jobless recovery and make the Obama administration
look bad.

STEPHANOPOULOS: Not if the insurance companies say they want to
play, and if they do ...

WILL: I want to move on to one final number, more than 80
percent of Americans are very satisfied with their health care plan.

ROBERTS: They're not satisfied with the cost, however. And the
fact that insurers get to make the decision about whether you get
treated or not. And doctors have reached the point where they have
really had it.

STEPHANOPOULOS: That is the debate right there.

REICH: Isn't it amazing? We are now talking about health care
when we are no longer talking about the economy. We have already
moved on to the next ...
STEPHANOPOULOS: They go together. Meanwhile, Elizabeth Edwards
was out talking this week about her husband, his campaign, and the
affair that could've doomed it had it been doing better.

She went on Oprah this week to talk about it. I think it had a
lot of people scratching their heads. But at one point we learned
that Elizabeth Edwards found out about it two days after John Edwards
announced he was running for president. Then remember three months
later there was a recurrence of her cancer. And Oprah asks her, why
didn't you get out then?

(BEGIN VIDEO CLIP)

OPRAH WINFREY, TALK SHOW HOST: I'm surprised because I think
that would have been your -- that was a way out. That was a way out.

ELIZABETH EDWARDS, JOHN EDWARDS WIFE: It was.

WINFREY: Considering the fact that you already knew that there
had been an affair.

EDWARDS: I knew that there'd been a night. That's all I knew.

(END VIDEO CLIP)

STEPHANOPOULOS: Now, Cokie, Elizabeth Edwards is an enormously
sympathetic and appealing, but I think a lot of people wondering.
What is this about?

ROBERTS: I'm very puzzled. I'm an admirer of Elizabeth Edwards.
I've felt all along that people had their nerve to criticize her for
staying in the race when she knew that her cancer had recurred, all
that. I think that people get to make their own decisions about these
things.

This one just puzzles me because of her children. I don't
understand how -- how they get through this public exposure without
being hurt.

DONALDSON: It's Elizabeth Edwards' revenge. And some people say
exactly right. She has it coming to be able to do this. But the time
to have done it in some senses was when she was standing up by her
husband, knowing about this, whatever part of it she knew about,
saying, you'd make a great president and following him along. Why was
that? Why did she do that?

Remember George W. Bush had a press secretary, Scott McClellan,
who stood in the press room and carried the water right down the line
and then wrote a book denouncing everything that he had done, saying
he was terrible. There is something smarmy about that.

REICH: Well, I -- you know, I keep asking myself, what is the
great public tragedy here? And the answer I come up with is the loss
-- despite his, you know, personal indiscretions of a man who was
almost the single voice in the campaigns for the poor, an advocate for
the poor, somebody who really was concerned about it, I'm sorry that
his public persona is over. His public office is over.

WILL: The public -- the tragedy would have been if he had won.
I mean, suppose the man had -- and you can reconfigure Iowa in some
ways since he takes off and anything can happen. Suppose he got the
Democratic nomination...

STEPHANOPOULOS: You know, that wasn't going to happen. I've
actually talked to a lot of former Edwards staffers about this, and
it's amazing to me, I mean, they had their doubts. They believed up
until December that this was not true. By December and January,
several people in his circle started to think, you know what, this is
probably true, this may be...

ROBERTS: You mean, the affair.

STEPHANOPOULOS: The affair. It may be true. And they actually
had something of a doomsday strategy. Several of them had gotten
together and basically said, if it looks like he is going to win,
we're going to sabotage the campaign, we're going to blow it up.

ROBERTS: Oh my goodness.

(CROSSTALK)

ROBERTS: And why do that? Why not just get out of the campaign
or why not go public in the first place?

STEPHANOPOULOS: The answer they give is that in December and
January, he probably wasn't going to win. Why bring everybody through
it? But then if he were, they were saying they're Democrats first and
they would have found the way to get the information out so that he
was not the nominee.

DONALDSON: But if they let it sabotage the campaign, it looked
like it might be successful, for whatever reason, the political
reason, it would...

(CROSSTALK)

STEPHANOPOULOS: But their point would be that it wasn't going to
be successful.

DONALDSON: Well, then, why not get out early? I agree with
Cokie, there is some moral imperative here that bothers me.

ROBERTS: And also, it could have had an impact on the eventual
nominee. Now I don't buy into this theory. But there is a theory
that if John Edwards had not been in there that it might have been to
the benefit of Hillary Clinton. Now, I -- you know, I think -- I
think it was Barack Obama's year. But I...

DONALDSON: Yes, but in Iowa, two-thirds of white people voted
for someone other than Barack Obama because they split the vote,
Edwards and Clinton.

ROBERTS: I mean, so if you say his staffers were going to
sabotage him...

STEPHANOPOULOS: They had suspicions, right.

ROBERTS: ... eventually, they -- I mean, they really should have
done it up front then. But the arrogance of all of this is just so
overwhelming to me. I mean, to get into a presidential campaign while
performing in such a manner is just, you know, I deserve it, it's all
about me. And it's just, blech.

STEPHANOPOULOS: And did he really think that he could make it
all the way through? We're just about out of time here.

Let's take one more look at President Obama last night talking
about Hillary in his stand-up act.

(BEGIN VIDEO CLIP)

OBAMA: We had been rivals during the campaign. But these days
we could not be closer. In fact, the second she got back from Mexico,
she pulled me into a hug and gave me a big kiss.

(LAUGHTER)

OBAMA: Told me I had better get down there myself.

(END VIDEO CLIP)

(LAUGHTER)

STEPHANOPOULOS: Now, not all presidents clear the bar in their
first outing at the White House Correspondents Dinner. I think Obama
probably did last night.

WILL: Absolutely. I mean, he has good writers, he has good
deliver, what more do you need?

DONALDSON: What I liked about it was all of the zingers were --
some in the Gridiron tradition, they singed but didn't burn. They
weren't mean. What I saw of the public prints master -- mistress of
ceremony, I can't say the same thing.

I think Rush Limbaugh should be condemned for whatever meaning he
had when he said he wanted the president to fail. And you can jab at
him for that, but she apparently crossed the line as far as I'm
concerned.

REICH: You know, one of the great strengths of this president, I
don't think he has a mean bone in his body. I think he is the center
of serenity with regard to the hurricanes that are going around the
economy and everything else.

And I think he is a genuinely, genuinely nice person, something
this town doesn't quite know what to do with.

(CROSSTALK)

DONALDSON: He had better develop a toughness. You don't have to
call it meanness.

ROBERTS: But he hasn't been a funny person. And so this was --
this was a test to see if he could be...

STEPHANOPOULOS: It has now become part of the job. You guys can
continue talking about this in the green room.

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